NEW YORK — The New York Attorney General's office said Thursday it filed civil charges against Bank of America and its former CEO Ken Lewis, saying the bank misled investors about Merrill Lynch before it acquired the Wall Street bank in early 2009.
Civil charges were also being filed against Joe Price, who was chief financial officer at the time of the deal and is now head of Bank of America's consumer banking division.
At the same time Attorney General Andrew Cuomo's office was filing its civil charges, the Securities and Exchange Commission reached a settlement to resolve federal charges it brought against the bank over similar issues. It is the second time the SEC and Bank of America have tried to settle that case.
Bank of America did agree to pay $150 million to shareholders to settle the SEC charges. The agreement still must be approved by U.S. District Judge Jed S. Rakoff.
Bank of America has been accused of failing to properly disclose losses at Merrill and bonuses paid to investment bank employees before the deal closed. Cuomo called Bank of America's actions "egregious and reprehensible" in deceiving shareholders and the federal government.
The bank, Lewis and Price are facing charges under New York's Martin Act, a wide-ranging securities law that is aimed at fighting fraud.
Cuomo's use of the Martin Act could be problematic for Lewis and Price. Unlike federal securities law, the Martin Act doesn't require proving any intent to defraud shareholders, said John C. Coffee, a Columbia Law School professor specializing in corporate governance and securities law.
Because it is a civil charge, there is no possibility of jail time.
Bank of America received an additional $20 billion in government bailout funds in January 2009 to help offset losses it absorbed as part of the Merrill acquisition. In December, Bank of America repaid the $20 billion, plus the initial $25 billion it received in government bailout money.
Lewis stepped down as CEO from Bank of America on Dec. 31 after almost a year of strife that followed the bank's purchase of Merrill.
Cuomo's office claims Bank of America intentionally misled shareholders about the more than $15 billion in losses Merrill recorded in the fourth quarter of 2008 to get the deal completed. Bank of America also hid $3.6 billion in year-end bonuses Merrill employees received as it asked its share holders to approve the deal, the suit alleges.
Bank of America then used the mounting losses to force the government to provide it with the additional $20 billion in bailout money, the lawsuit claims. Lewis has testified before Congress that he was forced by government regulators to complete the deal, even though he had trepidation about doing so.
Richard W. Painter, a law professor at the University of Minnesota and an expert on securities fraud, said the federal government's role in the merger makes the case particularly tricky.
If the Treasury or regulators were aware of any misrepresentation to Bank of America shareholders, then Cuomo will in effect be going after Lewis, Price and the bank "with the federal government as an accomplice," Painter said.